Ground Breakers: Rio makes nice with Mongolian Government, and MinRes farms in to Pantoro's lithium

Largely buried (in Australia at least) amongst the political issues Rio Tinto (ASX:RIO) brought on itself when it blew up the Juukan rock caves last year, the mining giant has also faced some hefty criticism for the endless delays to its Oyu Tolgoi mine in Mongolia.

You know who else isn’t happy? The Mongolian Government, who have persistently complained about the cost overruns and delays which have afflicted the giant copper mine in recent years.

The financing agreement for the US$5.3 billion underground development was completed by Rio Tinto, its Canadian listed subsidiary Turquoise Hill and Mongolia in 2015 and development approved in 2016, but it has suffered multiple delays, with construction of the 500,000tpa development now expected to cost US$6.75b and not open until January 2023.

The existing Oyu Tolgoi operations produced 41,935t of copper and 130,799oz of gold in the September Quarter.

Back in 2019, Rio outlined geotechnical issues as one of the reasons the project was running late and over budget — something poo-pooed by an independent report commissioned by the Oyu Tolgoi board this year.

Now Rio seems to have offered a make good to the Mongolian Government, a 34% shareholder in Oyu Tolgoi, with Turquoise Hill saying it and Rio have offered to write off a US$2.3 billion loan owed by the Mongolian Government.

“The offer follows on months of discussions between Turquoise Hill, Rio Tinto and the Government of Mongolia to understand the Government’s issues and priorities, deliver greater economic value to Mongolia and build a stronger partnership for a prosperous future for all,” Turqouise Hill said in a statement.

“Turquoise Hill remains committed to working with the Government of Mongolia to advance the Oyu Tolgoi project for the benefit of all stakeholders, including securing approval for the commencement of the undercut as quickly as is practical following the entering into of a definitive agreement among the parties.”

“Negotiations continue and remain subject to required approvals, with all parties focused on being in a position to finalise an agreement. A further market update will be provided as and when appropriate.”

RBC Capital Markets mining analyst Kaan Peker said the deal provides a path forward but comes at a “substantial cost” to project economics.

“Considering the high-margin and long-life of the Oyu Tolgoi underground, resetting the partnership does allow RIO to maintain longer-term optionality and would reduce the potential that they lose all interest in the mine,” he said.

“Financing structures, cash flows and timing all remain unclear, leaving a still uncertain outcome from a modelling perspective. This is likely to also set an unhelpful precedent for the industry. We would expect to hear more from RIO in the coming weeks.”

The deal with the Mongolian Government, which is not due to see dividends under current arrangements until 2041, would enable the underground development to go ahead.

“Approval from the Mongolian government is required to progress the 2020 feasibility study for the underground development to progress,” Peker said.

RIO has issued guidance that “first sustainable production will be no earlier than January 2023”, with capex of US$6.75bn (100%) and US$140m of COVID related costs at end of Sept 2021 (this amount excluding further project delays).

“The project (has) seen significant delays over the last 6-9 months due to COVID and approvals. As our base case, we assume a 6-month delay (commercial production commencing 2Q23) and project capex of US$7bn (100% basis),” Peker said.

Rio Tinto share price today:

MinRes chases lithium riches in Norseman

Mineral Resources (ASX:MIN) sees lithium as its trump card amid the volatility in iron ore prices that represent a major risk for the big miner.

MinRes and American partner Albemarle plan to reopen the Wodgina lithium mine next year, while MinRes is also planning to secure its share of offtake from Ganfeng for their Mt Marion JV near Kalgoorlie as spodumene and lithium chemical prices soar.

It is now bringing gold miners Tulla Resources (ASX:TUL) and Pantoro (ASX:PNR) along for the ride by farming into lithium prospects at their jointly owned Norseman Gold Project.

Pantoro has previously identified lithium rich rock chips in outcropping spodumene along strike from Liontown Resources’ (ASX:LTR) Anna lithium deposit, grading up to 3.96% Li2O. Drilling is expected to start immediately.

MinRes will spend a mininum of $500,000 within the first six months, $2.5m within 18 months, and earn 25% of the project by completing a feasibility study and JORC compliant resources within 24 months. Given the pace at which Chris Ellison’s company tends to run that is not unlikely.

It can earn a further 40% by funding the project to first production, with Pantoro and Tulla holding the right in that case to buy back up to a 49.9% stake in the JV.

The deal will allow Tulla and Pantoro to focus on the construction of the Norseman gold mine while MinRes runs the ruler over its lithium prospectivity.

““This new partnership is an outstanding outcome for Pantoro to maximise the value of a key mineral asset at Norseman,” Pantoro MD Paul Cmrlec said.

“The agreement allow us to progress without any distraction from our core business of gold development and mining, while maximising value for our shareholders.”

“Mineral Resources is a development and production focussed company with an excellent track record and reputation.”

“Pantoro has every confidence that Mineral Resources will ensure the successful development of the lithium assets. We look forward to rapidly generating drilling results from the highly prospective Buldania tenements.”